Alex M
In the UK, the CEO of Barclays Bank, Bob Diamond resigned on 3 July as a result of the LIBOR rate fixing scandal. Under the stewardship of Diamond and his CEO predecessors, staff at Barclays falsely reported interbank interest rates.
The false reporting of the rates by Barclays started in 2005 and seemingly continued through to 2009, coinciding with the first two years of the Global Financial Crisis (GFC). The London Interbank Offered Rate (LIBOR) is the benchmark rate for interbank loans. That is, LIBOR is a collection of the daily average interest rates that banks charge each other for loans.
It is important because a number of financial instruments such as derivatives, interest rate swaps and the like also use the LIBOR as a benchmark. There are 223 member banks that report on a daily basis to a firm called Thomson-Reuters who then publish the rates after 11 am, London time.
All very well, but what has come to light is that some of the banks, such as Barclays, manipulated their interbank loan rates not only to hide the true state of their financial affairs but also to boost their profits.
Profit maximisation as motive
The driving force of global capitalism is profit maximisation. The case of Barclays Bank and the LIBOR rate fixing scandal is a case in point. In the period 2005 to 2009, Barclays consistently ‘fudged’ their true interest rate positions, due in part, it has been suggested, to less than optimum performance. Senior management instructed Barclays LIBOR staff to lower their interest rate submissions to Thomson-Reuters to match other banks, dispelling any doubts about the bank’s viability. More importantly, the deliberate misreporting not only masked Barclays’ true financial position but it boosted profits.
The Marxist economist Michael Roberts in a highly critical piece on the sordid scandal illustrates how: “ … imagine you are a company [that] wanted to borrow some money from a bank and they wanted to look at your books to see how risky that loan might be. If your books were not that great, the bank may want to charge you a higher rate to cover the risk. But what if you got a lot of your customers to say they were paying more for what you sold them and you got your suppliers to say they charged less. Your books would look a lot better and you would be able to borrow more and at lower rates and so boost your profit. In effect, Barclays’ traders engaged in this trick in league with other banks to get the cost of their borrowing down.”
When it came to Barclays lending money to small businesses and ordinary people, it charged them the official LIBOR rate of interest, not the manipulated rate, giving the bank extra profits. For this financial ploy to have succeeded for the time that it did, required the cooperation of a number of banks. Investigations in the US and the UK have focussed on Bank of America Corp., Citigroup, Royal Bank of Scotland, UBS, Lloyds Banking, Deutsche Bank and others.
Barclays is the first of the banking cabal associated with this blatant corruption to have been caught out. Barclays was fined US $200 million by the Commodity Futures Trading Commission, US $160 million by the US Department of Justice and ₤ 59.5 million by the Financial Services Authority. The fines handed out to Barclays were discounted by 30% as reward for confessing their sins to the regulators. As Michael Roberts points out: “If the fine is $450 million at a 30% discount, … imagine the size of the trading involved and the profits made – it runs into billions.”
To help give an idea of how this rorting could run into billions, consider one of the abuses that the US Department of Justice is investigating in conjunction with the LIBOR scandal. As mentioned above, the LIBOR rates are the benchmark for a number of financial instruments such as derivatives. The trade in derivatives, whilst difficult to quantify, was estimated in 2008 to be in excess of $590 trillion US. Traders were allegedly in communication with bank staff, gathering information about that day’s rates. Such knowledge enabled traders to have a real ‘feel’ for the movement of the rates, to predict as it were the day’s rates.
There is evidence that for each basis point (0.01%) that the rate fluctuated, traders in the know could garner approximately a couple of million dollars on a given day’s trades. Multiply the number of traders in on the action and the number of trading days and a picture emerges about the possible amounts involved in just this aspect of trading activity. Clearly then, profit maximisation is the real driving force behind these corrupt bank practices.
The GFC in 2007/8 was the tip of the iceberg. The economies in the advanced capitalist countries had been showing signs of slow growth for a number of years and were being boosted by recourse to huge amounts of credit/debt. The financial sectors in the US, UK and Europe had been let off the leash through deregulation, beginning in the 1980s and continuing into the new millennium.
When the credit bubble burst in the US it set off a chain reaction which not only spread through the banking systems of most of the world, it also enmeshed capitalist states in places like the US, the UK, Ireland, Greece Portugal, Spain and Italy for instance. What ensued in a number of countries was the bailing out and propping up of banks and financial systems by governments, a process which has seen the enormous private debts of private sector banks magically transformed into massive state, hence public, debts.
States in capitalist countries have done the bidding of powerful financial corporations; amongst other things relaxing and/or reversing regulatory oversight, and when things went bad in the GFC, bailing them out. It is no surprise then that Barclays’ dirty dealings occurred.
What is the answer?
There can be no doubt that capitalist states, financial capitalism and the capitalist social system will always seek to enable profit maximisation (capitalist states) and pursue profit maximisation (financial capital and the system as a whole). Global capitalism, financial capital and capitalist states are moribund political and economic entities. They have to be transcended by socialism.
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